Top Heavy and change in NRA

[AndyH]

Top Heavy Plan with NRA of 55 amends NRA to 62 because 55 cannot be statistically supported.

Two employees were accruing top heavy 2% for five years. Assume regular formula was 1.2% x YOP.

Does the top heavy minimum simply become 2% x YOP max 20% payable at age 62, or is some type of conversion of the top heavy accrued benefit also needed to avoid a cutback and that becomes a grandfathered benefit, which in effect substantially reduces future top heavy accruals? Anybody dealt with this issue?

(This is a real situation but I don't know what was done, so I cannot answer "What does the document say?" I am trying to determine what was required to be done.)

Thanks for any comments.

[Lou S.]

Excellent question. I wish I had an excellent answer to give you.

Did the plan add a subsidized ERA benefit at age 55 that might effect this?

Can you treat it like a "wear-away" to avoid the anti-cut back rule on the TH Min benefit? That is greater of pre-amendment age 55 TH-minimum actuarially increased to age 62 or age 62 TH min with all TH service? Not sure if that is the correct way but that's probably how we would handle it.

[AndyH]

Thanks for the comments.

Yes, an unreduced early would be one way of solving this, albeit an expensive way. But that would be problematic for an integrated plan (this happens to be one) and potentially for a general tested plan

The wearaway approach does make sense; it just seems like non-keys will get burned for a while (and lose something that was "required" under 416) so I wonder if any pundits have addressed that.

[Andy the Actuary]

Top Heavy Plan with NRA of 55 amends NRA to 62 because 55 cannot be statistically supported.

Two employees were accruing top heavy 2% for five years. Assume regular formula was 1.2% x YOP.

Does the top heavy minimum simply become 2% x YOP max 20% payable at age 62, or is some type of conversion of the top heavy accrued benefit also needed to avoid a cutback and that becomes a grandfathered benefit, which in effect substantially reduces future top heavy accruals? Anybody dealt with this issue?

(This is a real situation but I don't know what was done, so I cannot answer "What does the document say?" I am trying to determine what was required to be done.)

Thanks for any comments.

In spirit of the NRA reg, would actuarially increase to age 62 the benefit accrued at age 55, which would be greater of formula benefit or top-heavy benefit. Thereafter, whatever benefit is determined which would be no less than the AB55 actuarially increased to 62, would be compared to 2% x YOP @62.

[AndyH]

Right, but, assuming a 6% annual actuarial increase, the 10% (5 x .02) top heavy accruals would instantly become roughtly 15%, so if there were no pay increases there would be no top heavy accruals for 2.5 years. Right? That's my issue.

[Andy the Actuary]

Right, but, assuming a 6% annual actuarial increase, the 10% (5 x .02) top heavy accruals would instantly become roughtly 15%, so if there were no pay increases there would be no top heavy accruals for 2.5 years. Right? That's my issue.

Sounds correct. The TH benefit is simply a minimum and you will have provided greater than that minimum elsewhere.

Note, the 1.2% will be actuarially increased as well at least regarding the accrued benefit. If you don't increase it prospectively as well, I believe you would need to give a 204(h) notice.

[AndyH]

Right. Even if the 1.2 became 1.8 retro and prospective there would be a future benefit accrual rate reduction on account of the top heavy situation.